NY judge: Apple conspired to raise e-book prices
NEW YORK (AP) — Apple Inc. milked the popularity of its iTunes store to form an illegal cartel with publishers to raise electronic book prices, a federal judge ruled Wednesday, citing "compelling evidence" from the words of the late Steve Jobs.
Wednesday's ruling by U.S. District Judge Denise Cote in New York sided with government regulators' contention that Apple joined five major book publishers to gang up on Amazon.com in a price-fixing conspiracy that caused consumers to pay more for electronic books.
Determined to protect one of the world's most beloved brands, Apple has steadfastly denied it did anything wrong, even as the book publishers involved in the case settled to avoid a trial. Apple didn't waver from its insistence of innocence after Cote drew an unflattering portrait of the iPhone and iPad maker in her 160-page ruling.
The Cupertino, Calif. company vowed to appeal the decision.
It's unclear whether the initial outcome of the case against Apple will have a dramatic impact on the pricing of e-books, which continue to supplant printed copies as more people buy tablets such as the iPad and other devices such as Amazon's Kindle.
The earlier settlements with book publishers were designed to encourage more discounting. But that hasn't happened, even at Amazon, which had unnerved publishers by selling e-book versions of popular hardcover titles for $9.99 before the April 2010 release of Apple's iPad.
It's a discounting practice that Apple and the publishers sought to eliminate leading up to the iPad's debut, according to the antitrust lawsuit filed last year by the U.S. Justice Department and 33 state attorneys general.
Apple's iTunes store, where hundreds of millions of consumers already were regularly buying music, videos and applications, provided a powerful platform to undermine Amazon's pricing system, the government contended in arguments that ultimately swayed Cote, who presided over the two-and-half-week trial.
Apple knew no publisher would risk acting alone to eliminate Amazon.com's $9.99 price for the most popular e-books so it "created a mechanism and environment that enabled them to act together in a matter of weeks to eliminate all retail price competition for their e-books."
"Apple seized the moment and brilliantly played its hand," Cote said. She wrote that Apple's deals with publishers caused some e-book prices to rise 50 percent or more virtually overnight. As part of its standard commission, Apple received a 30 percent cut of each e-book sold.
Cote, who hasn't yet determined the financial scope of the damages, said the evidence was "overwhelming that Apple knew of the unlawful aims of the conspiracy and joined the conspiracy with the specific intent to help it succeed."
Jobs' words played a pivotal role in the trial's outcome, even though the Apple co-founder and longtime CEO died in October 2011 after a long battle with cancer.
Government lawyers cited some of Jobs' email exchanges and thoughts that he shared with his biographer Walter Isaacson as proof of his willingness to collude with publishers. His aim, lawyers argued, was to gain access to more digital content that would help make the iPad a more attractive device.
In her ruling, Cote said "compelling evidence of Apple's participation in the conspiracy came from the words uttered by Steve Jobs, Apple's founder, CEO and visionary."
Isaacson wrote that Jobs said Apple assured publishers, "We'll go to the agency model, where you set the price, and we get our 30 percent and yes, the customer pays a little more, but that's what you want anyway."
Jobs told publishers that they had to allow Apple to sell at a lower price, if rivals also continued to discount. That's when the publishers asked Amazon to sign a contract requiring them to pay the higher "agency" prices. If Amazon refused, it wouldn't get any books to sell, Jobs told Isaacson.
The publishers that previously settled the price-fixing charges are Hachette, HarperCollins, Simon & Schuster, Holtzbrinck Publishers, doing business as Macmillan, and The Penguin Publishing Co. Ltd., doing business as Penguin Group.
Even though those settlements removed the shackles that prevented Amazon from discounting, the $9.99 price for e-books that publishers dreaded has become increasingly rare.
For instance, a Simon & Schuster book published Tuesday, Brad Thor's "Hidden Order," was selling Wednesday for $12.74. Neil Gaiman's "The Ocean at the End of the Lane," released last month by an imprint of HarperCollins Publishers, cost $12.80.
Amazon declined to comment Wednesday.
In her ruling, Cote said the conspiracy harmed consumers in numerous ways. Some had to pay more for e-books, she said. Others bought a cheaper e-book rather than the one they preferred to purchase and others deferred a purchase altogether rather than pay the higher price.
Although she acknowledged that many of Apple's practices in its dealings with publishers would individually be legal, Cote said they collectively furthered the goal of raising e-book prices across the board.
"Apple is confronted with the fact that the conspiracy succeeded. It not only succeeded, it did so in record-setting time and at the precise moment that Apple entered the e-book market," she said.
Apple spokesman Tom Neumayr said the addition of the iBookstore to the iTunes mall "gave customers more choice, injecting much needed innovation and competition into the market, breaking Amazon's monopolistic grip on the publishing industry."
Cote's decision wasn't surprising. She had urged Apple to settle before trial, warning that the only a slim chance of winning.
Apple did little to change her mind during the trial. She identified five trial witnesses as "noteworthy for their lack of credibility," including Eddy Cue, a top Apple executive described as Jobs' right-hand man.
Bill Baer, an assistant attorney general for the Justice Department, hailed the ruling as "a victory for millions of consumers who choose to read books electronically."
Tim Bajarin, an analyst at Creative Strategies who has followed Apple for more than three decades, believes the company has a good chance to prevail in its appeal. He thinks Apple can prove Amazon's low e-book prices were hurting publishers and authors at the time, whereas they are "a bit more consistent now."
Cote said a damages trial would follow, though none was immediately scheduled.
Investors largely shrugged off Apple's legal setback. Apple's stock shed just $1.62 to close at $420.73.
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Liedtke reported from San Francisco. AP National Writer Hillel Italie and AP Technology Writer Barbara Ortutay in New York contributed to this story.
